A2 Economics revision - The Great Energy Rip-Off?

Are power companies ripping off UK consumers?

Writing in last week’s Times on May 21st, Robin Pagnamenta explores whether there is evidence that UK energy companies are engaged in tacit collusion.

Clearly, the regulator thinks that they are. Whilst 5 million households switched supplier last year, it seems that the possible gains now only amount to the equivalent of a few pence per week even though typical bills now top £1,000 p.a. for gas and electricity together. When setting prices, suppliers seem to follow the lead of British Gas, the largest supplier with 18% of the market.

From 20 large companies 10 years ago, we are now down to just 6, making up 55% of the total UK market. This is set to rise to a six firm concentration ratio of 75% if EDF’s acquisition of UK Energy goes ahead.

Consumers complain that the companies make it difficult to switch, compounded by poor billing systems that leave prospective switchers with large bills to pay where direct debits have not been amended.

The power companies say that all of this criticism is unfair and that they are vicitims of spiralling global energy prices.

Well, have a read of the article for yourself here and then make notes on the following questions. You might also follow links to a couple of other articles about these issues in The Times. There are plenty of practical illustrations of some of the key concepts you need to know for your A2 examinations in the next couple of weeks.

1) Using a suitable definition, describe the degree of concentration in the UK electricity generating market, both before and after the proposed acquisition of British Energy by EDF.

2) What is meant by ‘price leadership’?

3) Analyse the evidence presented that there is ‘tacit collusion’ in the UK energy supply market.

4)To what extent can the rising cost of domestic electricity and gas in the UK be blamed on consumers being ‘ripped off’ by the energy companies?

5) What actions could the Regulator take to force the power companies facilitate easier switching by consumers between energy suppliers?

6) What appear to be the search and switching costs in the UK energy market and how do they affect different sectors of society?

7) Does the article suggest that there has been regulatory capture?